Plan Terms and Definitions

3(38) Fiduciary

An “Investment Manager” with full discretionary powers for selecting, monitoring and (if necessary) replacing the investment options in a qualified retirement plan. 3(38) represents the highest level of Fiduciary responsibility that can be assumed by an Investment Manger on behalf of a plan sponsor (see Fiduciary).

Annual Data Request (ADR)

The Annual Data Request will ask you to provide information regarding your employees (e.g. birthdate, date of hire, date of termination, gross compensation for the year, total 401(k) contributions made for the year, ownership status in the company). This data is necessary to accurately complete mandatory testing of the plan and as well as required annual government filings (e.g. Form 5500 or Form 5500-SF). This data is used for calculating the employer contribution options for the owners or Principals of a company.

Defined Benefit Plan

A company retirement plan, wherein a retired employee receives a specified payout based on salary history and years of service.  Contributions may be made by the employee, the employer, or both; but the employer bears the full investment risk.

Defined Contribution Plan

A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed is fixed, but the benefit is not.

Distribution

Movement of funds out of a retirement account, typically triggered by termination of employment, retirement, or reaching age 70 ½. Funds can be distributed as a lump sum cash payout or transferred into an alternative retirement account. Tax treatment of the distributed funds depends on age, method of distribution, tax status of the dollars in question at the time of the initial contribution (see Roth and Traditional).

Employer Contribution

The amount, if any, that a company contributes to eligible participant accounts as part of the terms and conditions of a retirement benefit.

Fiduciary

A person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. For retirement plans, the law defines that a Fiduciary must always act in accordance with the best interests of plan participants, following all plan rules and documents unless they conflict with the regulations outlined in ERISA. Fiduciaries must diversify investments and ensure that fees incurred in the service of their duty are reasonable. Fiduciaries suffer penalties when they do not perform their duties properly.

Fully-bundled

A professional service model whereby all related services are provided by a single provider. NestEggs uses a fully-bundled approach, providing plan design, recordkeeping/administration, and investment management for retirement plans.

Highly Compensated Employee (HCE)

For employer-sponsored, tax-advantaged retirement plan purposes, anyone who is a 5% owner of a company or who received more than $120,000 in compensation in 2017 (the compensation limit is adjusted annually and is a “look-back” on the previous year’s pay).

‘KEY’ Employee

A term used by the Internal Revenue Service in regard to company-sponsored defined contribution retirement plans to refer to an employee who owns more than 5% of the business; or owns more than 1% of the business and has annual compensation greater than $150,000 in 2017; or is an officer with compensation greater than $175,000 in 2017.

“Match” or Matching Contribution

A type of employer contribution whereby a company elects to make a contribution that is contingent on the employee’s deferral rate. The employer incentive may be discretionary and the terms of a ‘matching’ commitment vary from company to company.

Non-Highly Compensated Employee (NHCE)

For employer-sponsored, tax-advantaged plan purposes, anyone who has <5% company ownership and/or received less than $120,000 in compensation in 2017 (compensation limit is adjusted annually and is a “look-back” on the previous year’s pay).

Non-Qualified Plan

Any type of tax-deferred, employer-sponsored retirement plan that falls outside of employee retirement income security act (ERISA) guidelines. Non-qualified plans are designed to meet specialized retirement needs for key executives and other select employees. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to.

Plan Administrator

The “Plan Administrator” of a qualified retirement plan is defined in section 3(16) of ERISA, and is charged with the following primary responsibilities: 1) Ensuring all filings with the federal government (form 5500, etc.) are timely made; 2) Making important disclosures to plan participants; 3) Hiring plan service providers if no other fiduciary has that responsibility; 4) Fulfilling other responsibilities as set forth in plan documents.

Plan Sponsor

A designated party, usually a company or employer that sets up a retirement plan such as a 401(k) for the benefit of its employees. The responsibilities of the plan sponsor include determining membership parameters, investment choices and, in some cases, providing contribution payments.

Qualified Plan

A type of retirement plan established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income-tax liability by reducing taxable income. Qualified retirement plans help employers attract and retain good employees.

Rebalance

The process of moving money from one type of investment to another to maintain a desired asset allocation.

Required Minimum Distribution (RMD)

The amount that Traditional, SEP and SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70 ½ . RMD amounts must then be distributed each subsequent year. These Required Minimum Distributions are determined by dividing the prior year-end fair market value of the retirement account by the applicable distribution period or life expectancy.

Rollover

Transfer of funds from one eligible tax-deferred 401(k) or IRA account to another tax-deferred retirement account.   A rollover is not taxable, regardless of the age of the participant.

Roth

An option within some employer-sponsored qualified plans (and IRAs) allowing employees to defer money into the plan on an after-tax basis.   Roth contributions and any gains from investment returns earned on Roth contributions are not subject to taxation at the time the money is withdrawn.

Safe Harbor

A specific type of 401(k) plan that encourages employee participation, without discrimination in favor of highly compensated employees. Typically a Safe Harbor plan involves a matching or across-the-board employer contribution.

Salary Deferral

The gross pay contributed to a retirement account by an employee or individual on a pre-tax or Roth basis. The amount cannot exceed annual contribution limits established by the IRS.

Summary Plan Description (SPD)

A document that outlines and explains the fundamental features of an employer’s retirement plan including eligibility requirements, employee salary deferral terms and limits, company contribution formulas, vesting schedules, loan and distribution options, and more. ERISA requires that the SPD be easy to understand and that each participant receive a copy within 90 days of joining the plan.

Traditional 401(k)

Retirement savings vehicle that allows employees to make tax-deferred contributions to an account up to the IRS annual limit.

Trustee

A person or group of persons recognized as having exclusive authority and discretion over the management and control of plan assets; a subset of the overarching duty to control, manage and administer the plan.

Vesting

Refers to the period of time over which an employee gains rights to the entire amount of employer contributions to his account.  Employees are always 100% vested in their own salary deferral contributions.  For company contributions, the employer has several options under the Employee Retirement Income Security Act (ERISA) to postpone the vesting of their contributions to the employee. For example, an employer can require an employee meet a 3 years service requirement to gain ownership of the employer contribution portion of her account, which is known as cliff vesting. Alternatively, an employer may choose to have 20% of the contributions vest each year over a five year period, known as graduated vesting.

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Phone

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